We're economists writing about economics: Karl Smith and Adam Ozimek are both economists by training, and at heart. As most in our profession are eager to tell you, economics includes just about everything, so we'll be blogging -- with varying degrees of success -- about the economy, markets, politics, science, technology, philosophy and culture. We both come from a similarly vague libertarian ideological perspective, but we've been called neoliberal as well, and idiosyncratic might be the best adjective to use.

If Best Buy wants to survive, it’s got to replace its hulking, teeming stores with smaller, less crowded, more intimate spaces. When you walk in to buy a 32-inch TV, the guy in the blue shirt shouldn’t make you choose between a dozen nearly identical models. Instead, he should show you a single set, a TV that Best Buy’s experts have determined offers the best features at the best price. The firm could do the same across its inventory, culling the tech universe down to a few essential, can’t-beat products.

Traditionally, showrooms and the pre-sale services that stores like Best Buy offer have been defended as important parts of retail business. In fact, in anti-trust cases retailers have defended vertical restraints on retailers and distributors by appealing to the fact that cheaper competitors free ride on these services.

The way this works is that a retailer like Best Buy might get a manufacturer like Sony to impose a minimum resale price rule, or Sony may want to impose it without being prompted. These rules mean distributors, who compete with Best Buy, aren’t allowed to sell goods for below a specified price. This is economically similar to price fixing cartel among the distributors, and so anti-trust law should prevent it. But one of the justifications for allowing it is that consumers may benefit from the distributors providing pre-sale services like showrooms. These services need to be paid for, so stores with showrooms must charge a premium overall, while stores without showrooms can undercut them. This means customers could go to the showrooms of the premium priced store to browse and learn about the product, and then purchase the good at the cheaper store without a showroom. In this way the cheaper store free rides on the premium store. Minimum resale prices prevent this, and this is one reason why such vertical restraints no longer necessarily violate anti-trust laws.

Interestingly, the case of Best Buy might reflect the declining importance of showrooms and other brick and mortar pre-sale services in the age of the internet. Farhad argues that online retailers free ride on the showrooms of Best Buy, as is alleged in the defenses of vertical restraint:

Maintaining a big selection costs big money and offers a perverse advantage to Best Buy’s online rivals. By keeping so many TVs on its sale floor, Best Buy is offering itself up as a showroom for Amazon: Potential customers can walk into a store, check out the stock, and go home and buy the product they like best online.

But it seems to me that the pre-sale services offered Amazon, in particular customer reviews, are usually of far greater use to me than a showroom when buying electronic goods. Sometimes when shopping for electronics I’ll make the purchase in the brick and mortar (so returns are easier and I can get it faster) while looking up the ratings of the product on my iPhone at Amazon.

What is interesting is that on the one hand, customer ratings from Amazon are similar to the pre-sale services offered by brick and mortar stores that were used to justify vertical restraints. But on the other hand, these pre-sale services aren’t very expensive for Amazon to provide. In fact the reviews themselves are provided for free by customers. It’s hard to imagine that Amazon would be underbid by a low-cost web retailer who was saving a lot of money per unit by not providing customer ratings systems. So it would be hard to use Amazon’s pre-sale services to justify vertical restraints.

In general, I think it is a good thing that anti-trust allows vertical restraints. So perhaps its fortunate that courts reversed their position on this recently, as in another few years the defense of preventing free riding on pre-sales services may no longer be credible.

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